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11 October 2016

The Bigger Picture #nlpoli

Whatever the provincial government is doing about its own spending or the provincial economy generally or whatever it is up to starts at 9:00 AM.

They announced an invitation-only event by Twitter a week or so ago that made it sound like the Premier would be the key player all day. On Friday, the official announcement made it plain Ball is showing up for the kick-off and wrap-up. Another announcement had him with another minister doing a funding announcement at 10:00 AM.

Oh yeah, and that invite-only thing had transmogrified into a case where "the general public" can participate by live video using social media.

There you have it: can't tell you what they are doing because they do not know what they are doing, otherwise known as "making-it-up-as-they-go."

No encouraging at all, but let's skip over that sort of eye-roll inducing stuff and think about some of the bigger issues. We can then keep an eye open to see how they turn up - *if* they turn up - in this stunt at The Rooms.Our aging, shrinking populationRichard Saillant is head of the Donald Savoie Institute. He's an economist with experience in the senior ranks of the federal public service. His latest book is about the impact of changing demographics on the four Atlantic provinces. Saillant was in St. John's a couple of Friday's ago to talk about his book and the changing demographics in the region.

Saillant's point is simple enough. "The twin forces of economic and demographic gravity spell trouble for eastern Canada," as the blurb for A tale of two countries puts it, "and for the country as a whole, if we don’t act now. First we must face a harsh
truth: 'the contrast is stark between have and have­less [sic] provinces and it is
about to get starker.' The result? Two distinct Canadas:
one poorer, older; the other younger, dynamic. While the former struggles to
weather the demographic storm, the latter, while maintaining the status quo, will
have “little appetite for bailing out the older Canada.”

This is a familiar point for regular readers. Our population is shrinking. It is getting older, on average. Demographics will hit Newfoundland and Labrador proportionately harder than anywhere else in Canada. We will see increases in our costs for health care. At the same time, the labour force will shrink both in absolute terms and as a share of the population as a whole.

The provincial government's ability to deal with this is limited, especially in comparison to the money available to the federal government. But, as Saillant notes, the federal government will be facing pressures from the more populous western parts of Canada. We have already seen some signs of this with changes to federal transfers that put them on a per capita basis.

The cost of public debt

Although Saillant didn't get into this, Newfoundland and Labrador's situation is significantly worse than other provinces not just because of the demographic changes. The provincial government will also feel the effects of the downturn in the oil and gas economy and the burden from Muskrat Falls.

For starters,we are staring at an annual deficit of about $2.0 billion due to chronic overspending by the past four administrations, including this one. The provincial government's debt will hit record levels due to the combined impacts of the chronic overspending and Muskrat Falls. Conservatively, we are looking at a public debt running somewhere between $25 and $30 billion for what will be a population of less than 500,000 people in an economy that produces about the same value in goods and services. Fully two thirds of that debt has come since 2003.

The cost to the provincial government of servicing that debt will severely limit the government's ability to shift money around to pay the mounting bills. Debt servicing is already the second largest expense the government faces each year, the third largest if we lump all education costs - grade schools and post-secondary - into one bill. Within the next decade, debt servicing will easily be the second highest expenditure, after health care.

Debt servicing is not one the government crowd can easily reduce. And once they start adding debt in foreign currency, the crowd running the place will face a fluctuating cost for debt servicing that comes from the varying currency exchange rates. The more of the debt in foreign currency, the bigger the fluctuations and hence the more that debt can consume of annual spending.

There's also an upper limit to how much tax the economy can handle. Muskrat Falls, for example, is nothing more than a massive new tax on the provincial economy. None of its proponents talked about it that way but Muskrat Falls' revenue stream is just sucked out of local taxpayers like any other provincial government tax. That's why it is so funny to see all the Muskrateers and miscellaneous Conservative supporters griping about recent tax increases.

Private debt limits government tax room

Then there's the high level of public debt in the economy generally. The government isn't the only bunch that over-extended in the good times. Very slack mortgage rules allowed many people to mortgage homes well beyond their ability to pay if interest rates moved up. Many more bought so far beyond their financial ability to pay that they were house rich and cash poor.

The result is easy enough to see in the increase in personal bankruptcies as the economy has turned down. New mortgage rules that come into effect this month will take the heat out of the housing market but they will also reduce the number of financially fragile home-owners in the market inflating prices. The result that's not so easy to see, though, is the limit this level of indebtedness generally in the economy places on the government's ability to cover its debts by raising taxes, fees, and other charges.

Higher cost of business: not a good thing

High taxes can make the economy less attract to investment, another Muskrat impact its proponents never considered. And if you want to see the impact of these sorts of high costs, look no further than Scotsburn. The company had two ice cream manufacturing plants serving Atlantic Canada and another in Quebec. They had their original plant in Nova Scotia plus they had the former Brookfield plant in St. John's they scarfed up in the 1980s.

The company's chief operating officer was clear about the decision in a corporate news release: "Scotsburn is under tremendous pressure to reduce costs and
become more efficient as our ice cream industry is very competitive." Aside from anything else, one of the big changes for Scotsburn in this province is the impending jump of electricity prices by something like double the current level. Add in higher costs across the board in the province as the government struggles with its own financial mess and you can see how quickly this province became uncompetitive.

Scotsburn can alter its costs by cutting out is operation in Newfoundland and Labrador. Even if they have to truck product into western Newfoundland, it will be cheaper coming onto the island with a full tank of cheap Nova Scotia gasoline. They can also ship onto the island using the regular supply run by Oceanex. And that's before we consider the size of the ice cream market on the island in the first place. Meanwhile, the dairy farms on the island with an industrial milk quota now have to try and find a new market for their product. This is before we even get to seeing how bad things are in reality once all these extra costs from things like Muskrat Falls cut in. Think about that.

The Myth of Uncle Ottawa
The current crowd running the place are putting great stock in squeezing more cash from Uncle Ottawa. In fact, that's the basic plan the provincial government has had since 2003. It didn't work before so there's little reason to believe it would work now. That was *before* anyone factored in the general changes in federal attitude because of changing national demographics. And it certainly doesn't take into account the general attitude you are likely to see as the provincial government here goes off t Ottawa to beg hand-outs for a project they know doesn't work - Muskrat Falls - and to cover off the massive debt resulting from our own incompetence. Since we caused our own misfortune, it will be very hard to persuade anyone we deserve financial help, especially if the government isn't really trying to mend its own ways.

Those are just a few things to think about when you start listening to the government's plan or whatever it is to deal with its own spending or the economy or whatever it is today.